KPMG says that one in five workers is paid less than a "living wage", of £7.20 an hour outside London and £8.30 in it. This is consistent with official figures which last year found that 20% of employees earn less than £7.31 per hour.
This reflects a fundamental problem with the global economy - that the rise of China and India has contributed (pdf) to a collapse in demand for low-skilled workers in the west.
What can be done about this?
Paul Sellars points to large firms hoarding cash and claims that transferring some of this to pay packets would "revive consumer spending and business confidence, thus helping to kick-start the recovery." I'm not convinced. I suspect many of the firms paying low wages are small firms struggling to get by, not the mega-corporations stock-piling cash.
Paul also claims that:
Many of these companies could actually gain from adopting the living wage. First, their reputation for corporate social responsibility would be enhanced – being “nice” can be a valuable selling point. Second, they would derive solid personnel benefits in terms of recruiting, retaining and motivating high-quality staff.
This, I fear, is the fallacy of composition. It's true that any individual firm paying good wages would get reputational gains, the pick of staff and lower turnover costs.But this wouldn't be true if all firms did so.
Nor am I convinced by the obvious statist policies.
There are two problems with raising the National Minimum Wage:
- It wouldn't hugely benefit the low-paid to the extent that a higher wage causes the withdrawal of tax credits and higher income tax payments. Such withdrawal rates mean that many low-paid might see only 30p of a £1 rise (pdf) in wage income.
- It would (perhaps?) reduce labour demand - in terms of jobs or hours. If we assume the average low-paid worker outside London gets £6.70ph, raising the NMW from £6.19 to £7.20 implies a 7.5% rise in the wage bill. Assuming a price elasticity of demand of 0.5, this implies a 3.75% reduction in demand for labour - equivalent to 160,000 job losses.
However, the alternative - more generous tax credits - also have problems, even assuming (generously) that there is popular demand for such redistribution:
- Employers might respond to higher tax credits by cutting wages. One reason why a minimum wage was introduced was precisely to stop this happening when tax credits were introduced.
- More generous support for the low-paid must be withdrawn as wages rise. But this means even higher marginal withdrawal rates and thus reduced incentives to work longer hours or get better jobs. This is an unavoidable trade-off with any system of in-work benefits.
So, what are the alternatives? I'd like to consider ways of increasing the bargaining power of the low-paid, perhaps through some combination of stronger unions, the state acting as employer of last resort and a basic income.
But let's be clear. There's a bigger problem here than all our political parties are willing to acknowledge: predistribution, in the form its currently envisaged, is not sufficient.